SINGAPORE (Sept 7): CIMB is reiterating its “add” call on Best World International (BW) with a target price of $1.80 given China's campaign to crack down on pyramid schemes is having little to no impact on the group.

BW’s management has denied it is a pyramid scheme, claiming its direct selling business has different characteristics.

Last November, China’s Ministry of Commerce (MOFCOM) also awarded it a direct selling licence, showing that its business operations comply with the country’s rules.

In a Wednesday report, CIMB analyst Cezzane See says, “Approvals to extend geographical coverage of BW’s direct selling licence beyond Hangzhou are also ongoing, an indirect signal that licensed direct selling players are not the target of this campaign.”

Following the pyramid selling crackdown campaign by China’s State Administration for Industry & Commerce (SAIC) on Aug 15, the group has seen no noticeable slowdown in consumer sentiment.

Management says this campaign is unlikely to have an impact on its earnings.

Under its existing licence, the group intends to add key cities in two or three other provinces by end 2017, while it plans to begin converting to a direct selling model in 1Q18.

This process will be implemented in phases over the span of two years, given the size of the Chinese market.

The group acquired a 4,550 sqm facility in Tuas last year to enhance its inventory cycle. In order to break into Muslim markets, especially in Indonesia, the facility would impose Halal production requirements in 2019.

“BW estimates equipment and renovation works will require capex of $15 million to $20 million (minimal, given its net cash position of $42.7 million at end-2Q17), with operations due to commence by end-2018,” says See. 

In addition, the group is looking to Japan for non-organic growth opportunities, as the country is one of the largest direct selling markets in Asia. However, there has not been any timeline guidance on the potential M&A.

The group currently has negligible debt on its balance sheet.

“We believe BW’s share price would only recover significantly when its China business shows proof of earnings growth in Nov 2017, which we will also be looking closely at,” says See.

As at 11.25am, shares in BW are trading 2 cents higher at $1.26 or 4.11 times Dec 18F book with a divided yield of 2.24%.